Where does premium collide?

The premium is the price a policyholder pays an insurer for coverage over a fixed period, set so that expected claims are covered plus a loading for risk, expenses, and profit. Bühlmann's 1980 An Economic Premium Principle formalised how such a price can be derived from the distribution of possible losses and the insurer's tolerance for risk, rather than from a flat markup. Here the referent is the cost of transferring risk, quoted in money per period of cover, and it is not an excess return demanded in a market, an extra wage tied to a worker's trait, or a high price set to signal quality.[1]

Unit

One policy's price for a period of cover, in money per period

Recovery means

Not applicable

Measured by

Calculated from the loss distribution as expected claims plus a risk and expense loading

In finance a premium is the amount by which one price or return exceeds a reference, most centrally the excess return investors require for holding a risky asset over a safe one. Mehra and Prescott's 1985 The equity premium: A puzzle measured the large historical gap between stock and riskless returns and showed that standard models could not explain its size, naming the reward markets pay for bearing risk. The referent is a differential return earned for taking on risk, measured in percentage points per year, and it is not the price of an insurance policy, an extra wage, or a marketing price tag.[2]

Unit

An excess return over a reference, in percentage points per year

Recovery means

Not applicable

Measured by

Estimated as the average return of a risky asset minus a riskless rate over a period

A wage premium is the extra earnings associated with a particular characteristic, such as more schooling or a scarce skill, measured as the gap in pay between workers who have it and otherwise similar workers who do not. Katz and Murphy's 1992 Changes in relative wages, 1963-1987 traced how the pay gap favouring more educated and skilled workers moved with the supply of and demand for their labour. The referent is a difference in labour earnings attributed to a trait, expressed as a percentage of wages, and it is not the price of coverage, a return demanded by investors, or a deliberately high product price.[3]

Unit

A pay gap tied to a trait, as a percentage of wages

Recovery means

Not applicable

Measured by

Estimated from wage regressions comparing workers with and without the trait

Premium pricing is the strategy of deliberately setting a high price so that the price itself signals superior quality or exclusivity to buyers who cannot verify quality before they purchase. Kirmani and Rao's 2000 No pain, no gain reviewed how firms use costly, hard-to-fake cues, a high price among them, to convey unobservable product quality. The referent is a pricing decision meant to communicate worth and status, chosen in money at the point of sale, and it is not the actuarial price of risk, an investor's reward for risk, or the extra pay a worker earns for a trait.[4]

Unit

A price set above rivals, in money at the point of sale

Recovery means

Not applicable

Measured by

Observed as a price gap over comparable goods and tested against quality perceptions and sales